SMALL CAP IDEA: Condor handed milestones to get La India prepared

Analysts sometimes discuss value inflexion points, which are milestones that support an investment thesis, typically backed by third-party data.

In mining, this might be provided by a feasibility study; in drug development, by the completion of a clinical trial.

In an ideal scenario, this de-risking would align with an increase in a company’s value.

Milestones: Condor has passed significant milestones to get La India 'shovel ready'

Milestones: Condor has passed significant milestones to get La India ‘shovel ready’

While this often happens, it is not always the case.

Consider this latter point in the context of Condor Gold, the owner of the 2.3million-ounce La India Project in Nicaragua.

Condor has passed significant milestones to get La India ‘shovel ready’ and is now seeking a buyer to bring the mine into production within 12-18 months.

This means it is just months away from a crucial and final inflexion point – value crystallisation.

Under the plan developed by Condor, the mine would begin life as an open-pit operation producing 82,000 ounces annually, increasing to 150,000 ounces in three years.

The initial capital expenditure required, which put at a relatively modest $106 million, with a semi-autogenous grinding (SAG) mill already in place.

Politics: La India is likely to attract buyers familiar with the country or comfortable with South and Central American politics

Politics: La India is likely to attract buyers familiar with the country or comfortable with South and Central American politics

Permitting is complete, and the land for the operation has been acquired.

It has taken a decade and around $90million in shareholder funding to bring the project to this point.

That 82,000-ounce per year production figure is for a single open pit. An additional two are fully permitted for extraction.

So, it is expected a buyer would drill these out during a construction phase and start with circa 120,000 ounces of gold a year from three permitted pits from day one.

Now this is important when we look at the project economics.

Before we do, it’s worth noting that La India is not without its challenges, chief among them Nicaragua itself.

The United States has imposed sanctions on the country due to concerns over human rights abuses, corruption, and the erosion of democratic institutions under President Daniel Ortega’s government.

This has been a discount factor for some investors and might impact potential buyers’ interest.

That said, Condor’s chairman, Jim Mellon, who owns 26 per cent of the company and is leading negotiations with potential buyers, reported in mid-May that discussions are ‘advanced’.

Eight companies are under NDA, and there have been five non-binding offers and three site visits.

While no firm offer has been received, detailed talks are ongoing with one gold producer, and two other parties are actively reviewing the company’s assets.

‘The board is optimistic that a sale will be concluded in the near future,’ Mellon told investors in commentary alongside the recent prelims.

This level of interest in an asset located in a supposedly challenging mining jurisdiction is notable.

And despite the sanctions, Nicaragua has an active natural resources industry with a well-defined legal and fiscal framework.

Operators receive 25-year exploration and exploitation concessions, are taxed at 30 per cent, and pay a 3 per cent net smelter royalty.

Investors retain 100 per cent of their developed assets without a free carry to the government, enhancing the investment case.

The gold sector includes three major operations: Bonanza, El Limón, and La Libertad.

Local authorities are described as mining-friendly, with operations considered no more difficult than in Mexico.

La India is likely to attract buyers familiar with the country or comfortable with South and Central American politics.

Chinese investors, known for taking on more risk, might also be interested.

The 2022 definitive feasibility study of La India’s phase-one, open-pit development, representing about 40 per cent of the resource, delivers a ‘base case’ net present value of $87million (post upfront costs), which represents a premium to Condor’s current market value of $70million.

This assumes a gold price of $1,600 an ounce.

That NPV rises to $320million at current gold prices, assuming a 5 per cent discount rate and an all-in-sustaining cost of $1,039 per ounce. The payback period would be 20 months.

Now, remember analysts expect this project to open at 120,000 ounces a year for six years.

So, adding in the two feeder pits the asset takes on a whole new dimension.

Life-of-mine earnings (EBITDA) would be $1.36billion (based on an all-in cost of $815 an ounce), according to the company’s 2021 preliminary economic assessment.

On that basis, the payback would be a mere seven months, while the NPV is put at just over $600million, giving an IRR of 101 per cent.

All things being equal, a sale could be struck in a matter of months, which means Condor is on the brink of a significant inflexion point.

Yet, the current share price, stagnant over the past 12 months, does not reflect even the base case valuation for La India.

This undervaluation persists despite bullish gold futures predicting prices above $2,700 per ounce by the decade’s end.

Investors should note that while the potential for substantial returns exists, so too does the risk that no buyer emerges for La India. This is a classic risk-reward scenario, not a risk-free investment.

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